Coffee is one of the most popular drinks in the world, consumed by millions of people across the globe. Recent dry spells in Brazil, coffee rust in Central America, and other conditions have spent arabica coffee prices skyrocketing. Now companies that rely on coffee, such as Starbucks, could be facing declining profits unless they raise prices or incorporate rubusto coffee into their blends.
Dry spell in Brazil hurting coffee crop
Brazil is the world’s largest producer of coffee. When production is restrained elsewhere, Brazil can often pick up the slack by increasing production. A recent dry spell, however, has hurt coffee crops across the country. The drought hit in December, right when Brazil’s coffee plants were supposed to be maturing and flowering. Entire crops have been lost and production costs have been rising.
Now, many analysts are predicting a shortage of 5 million or more pounds of coffee this year. Deliveries for coffee in March have already reached a high of $1.72 and there appears to be little chance of relief in the near future.
Deprival Super-Reaction Syndrome And Investing. Part four of a short series on Charlie Munger’s Human Misjudgment Revisited. Charlie Munger On Avoiding Anchoring Bias Charlie Munger On The Power Of Prices The Munger Series - Learning . . . SORRY! This content is exclusively for paying members. SIGN UP HERE If you are subscribed and having an Read More
Coffee leaf rust hitting Central America
Besides Brazil, coffee farmers in Central America have been battling leaf rust. It is estimated that as much as half of Central America’s coffee growing areas have been affected by leaf rust, a fungus that can destroy entire coffee crops.
It is believed that output from Central America has dropped by as much as 20%, causing over a half billion dollars in damage. While governments have been working to contain the disease, it is difficult to fight and it may be years before production in the region fully recovers.
Global markets had actually recovered from the rust infection after output increased elsewhere. The dry spell in Brazil, however, has hurt production from South America. Now, Arabica coffee prices have hit a 16 month high and with production in both South and Central America constrained, prices might not be dropping for some time.
High coffee prices will hurt coffee-dependent companies like Starbucks
Combined, the drop in output from South and Central America has sent coffee prices spiking some 55% this year. Just this past November, Starbucks Corporation (NASDAQ:SBUX) was predicting a 120 million dollar windfall after coffee prices cooled off following the Central American leaf rust crisis. Now, however, prices have reached new highs, wiping out said gains.
Starbucks Corporation (NASDAQ:SBUX) and other companies could use robusto beans in their coffee blends, however, the bitter taste and stigma associated with them makes it unlikely that premium brands will use said beans. Starbucks and other companies have already have secured contracts through the next few months so a short term spike likely won’t hit their bottom line or force them to raise prices.
If coffee prices remain high, however, Starbucks Corporation (NASDAQ:SBUX) and other coffee retailers may find themselves in a tight spot. Either face reduced profits, or raise prices. Rising prices, however, could encourage people to brew their own coffee, use alternatives, or reduce consumption.